Your Taxes.

Election-year Largesse For The Little Guy

A tax bill that would provide billions of dollars in election-year tax breaks for small businesses and millions of individuals advanced last week in Congress when Senate tax-writers added some flourishes to a House-passed version.

The legislation started out as a way to mitigate the impact on small business of a proposed hike in the minimum wage, which the House approved separately and is a top priority of the Clinton administration.

But both House and Senate tax writers seized the opportunity to tack on some new tax breaks for individuals and large corporations. The Senate Finance Committee did a lot more tacking. Its version is more than double the $7 billion price-tag of the House version.

Here are some of the key measures contained in the Senate plan:

- Airline ticket tax. For airline passengers who have enjoyed not having to pay the usual 10 percent federal tax on plane tickets since the beginning of this year, it appears the party is about to end. To help pay for the small business tax package, the Senate bill would reinstate the 10 percent excise tax on domestic airline tickets, as well as the $6 fee for international departures. A similar measure is pending in the House. The aviation taxes, which helped fund the Federal Aviation Administration and airport improvements, lapsed at the end of last year amid the budget battles between Congress and the White House. Despite the legislative proposals to quickly revive the aviation taxes, travelers still have time to buy tickets for summer vacations or other future travel without having to pay the tax. As the legislation is currently drafted, the reinstated taxes would only apply to tickets purchased after the legislation is enacted. In fact, the Senate bill wouldn't reinstate the tax until a week after the legislation is signed into law.

- "Luxury" car tax. Buyers of higher-priced cars would get a break under the Senate bill. The 10 percent excise tax on "luxury" automobiles would gradually be phased out. The luxury tax applies to the amount the car's purchase price exceeds $34,000. The Senate bill would reduce the 10 percent rate by one percentage point a year through the year 2002 and then abolish it. The measure is slated to take effect for cars purchased on or after this July 1.

- Retirement accounts. The Senate bill adopted many of the proposals approved by the House to ease some of the complex restrictions that apply to company pension plans and 401(k)s. Most prominent is a new simplified form of retirement plan for small businesses. But the senators also made one change to individual retirement accounts. Beginning next year, the Senate bill would give homemakers equal rights when it comes to making IRA contributions. Under current law, a non-working spouse can contribute only $250 a year to an IRA, compared to $2,000 for a spouse working outside the home. The Senate bill would end the discrimination and allow one-income couples to contribute up to a combined total of $4,000 a year, instead of the current maximum of $2,250.

- Pension cutbacks. To help pay for the pension proposals, both the House and Senate bills would abolish a valuable tax break for retirees who take their company pension in a lump sum. Retirees would no longer have the option of figuring tax on lump-sum distributions using the favorable "five-year averaging" method. But there is no need for workers to rush to retire anytime soon. The tax break isn't scheduled to pass into extinction before 1999.

- Adoption credit. A new tax break would be created to subsidize the cost of adopting a child. The Senate committee endorsed a House-passed measure that would make most taxpayers eligible for a tax credit of up to $5,000 for each child adopted. (The credit would be reduced for taxpayers with adjusted gross incomes above $75,000 and wouldn't be available for those with incomes above $115,000.) Senators went a step further than the House and added a provision that would provide an extra $1,000 credit when the adopted child has a disability or some other "special need." The tax code used to provide a tax deduction of up to $1,500 for adoption of children with special needs. But the deduction was abolished by the Tax Reform Act of 1986.